Ruthless Objectivity

A recent fire loss serves as yet another cautionary tale in making a coverage decision before all of the evidence has been gathered. All of the usual red flags were there: a fire at a business in the dark of night; the insured admittedly at the property immediately beforehand, with no viable alibi at the time of the fire; and a financial outlook that was bleak at best.

The direction this claim was headed seemed a foregone conclusion -- until a week later when the electrical engineer concluded the fire was accidental, much to the surprise of everyone involved.

Prejudging claims is all too easy. On a subconscious level, we rely on years of experience to give us a useful feel for the issues and a sense of how best to approach a claim. The danger is when that experience leads us to oversimplify -- or worse, to impulsively make decisions based upon suspicions rather than the evidence.

Reckless claim decisions will not bear regulatory scrutiny. Although the language varies, most states have statutes and regulations that explicitly require fully informed claim decisions after a thorough investigation, with careful consideration given to all of the facts. Under laws regulating claim practices, the real focus is on the decision-making process rather than the ultimate claim decision itself.

Evidence Over Inkling

One can easily imagine the judicial reaction when an insurer's denial of a claim appears to be pre-ordained. For example, in a Louisiana case, Gibson v. Allstate Insurance Company, the court had harsh words for what might be described as a "minimalist approach" to investigating a burglary claim.

The insured reportedly returned home to discover someone had forced entry, ransacked a bedroom, and stolen various items of personal property. Even though the insurer initially assigned a local adjuster to the claim, the file was quickly transferred to an out-of state special investigator. The resultant independent investigation was limited to a telephone interview of the insured. Great weight was given to a police dispatcher's casual comment that the burglary was probably staged, despite the fact that the police did not examine the burglary. The claim was ultimately denied for failure to provide sufficient proof of ownership, although suspicions about the insured's role in staging the burglary actually motivated the decision.

The insured successfully challenged the decision in court, but the trial judge's comments about the claim investigation are particularly useful here:

"The Court is troubled most by the lack of effort ... to thoroughly investigate the claim. [The insurer] was happy to write the policy ... yet it seemed to deny the claim before making an honest effort to determine its validity." In the court's view, the investigator had failed to act in good faith, spending "far more time and effort to defeat the claim than [he] ever did investigating the claim in the first place."

None of us aspires to be on the business end of such a court decision. But how can we avoid this type of outcome? It is true that tools for identifying issues, indicators, and "red flags" abound. Without objectivity, however, those tools quickly become grounds for rationalization rather than guides for effective investigation. We must consciously choose to remain ruthlessly objective about a claim. This means disciplining ourselves to put aside our feelings, biases, and suspicions in favor of careful, deliberate decision-making until our investigation is complete.

So put those suspicions aside. Carefully plan and perform a thorough investigation. Wait until you have all of the available evidence; and then -- only then -- make the call.

George E. Reede, Jr. is a partner in the litigation department of Niles Barton & Wilmer, LLP. He has been practicing in the areas of insurance coverage analysis and subrogation for over 19 years. He may be reached at gereede@nilesbarton.com.